Student loan debt vs investing

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Topic Author
itsdan89
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Joined: Wed May 05, 2021 3:14 pm

Student loan debt vs investing

Post by itsdan89 »

Emergency funds: 4 months expenses + 14k to pay off student loan A.

Debt:
Student Loan A – 14k @ 4.375 (currently 0% - have cash on hand to pay)
Student Loan B – 141k @ 6.85 (currently 0% and will be refinancing @ ~3%)
Mortgage – 92k @ 4.125%

Tax Filing Status: Married

Tax Rate: Federal 24%

State of Residence: New York

Age: 32 and my wife is 36

New annual Contributions
$9,700 his roth 401k + 3,880 match
$9,400 her traditional 401k + 3,760 match
IRA accounts were recently opened with some 401k rollovers so will be looking to reallocate some of these contributions to the roth IRAs

Total portfolio is ~$150k right now


Trying to determine how aggressive to be with paying off 140k student loans. We are in the process of refinancing and are looking at 3.2% @ 10 years or 3.08 @ 7 years.
Should we be looking at dropping our 401k/IRA contributions to the lowest possible to earn our company’s match to be as aggressive as possible with the debt?
Does it make more sense to pay the minimums and more interest and invest more to take better advantage of compounding interest?
I have 14k set aside to pay off my smaller student loan – would it be unwise or worth it to invest it for 6 months until the interest is set to resume? If so what kind of investments might be suggested?

Thanks in advance
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FiveK
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Re: Student loan debt vs investing

Post by FiveK »

itsdan89, welcome to the forum.

The Paying down loans versus investing question has no "correct" answer except in hindsight.

Some people will tell you that being debt free is the best feeling in the world. Some people tell you that investing is the smart move. Many in those two groups can't understand the others. ;)

In addition to the wiki article linked above, see also Investment Order and Prioritizing investments for thoughts on this.

The fact that you are thinking about this at all bodes well for you. Good luck!
flyfishers83
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Re: Student loan debt vs investing

Post by flyfishers83 »

A lot of this comes down to goals. Is it more important to have your loans paid off, or more important to work on investing. You can't know which is financially optimal in advance. You can also take a middle path of paying down loans somewhat aggressively and investing.

With respect to investing your money earmarked for loan payoff, the usual answer is don't. You can't predict whether your 14k would be worth 15k or 12k when you need it. How upset would you be if you were down a couple of thousand dollars when you were planning to use it?
Lee_WSP
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Re: Student loan debt vs investing

Post by Lee_WSP »

Paying off loan A is going to reduce your monthly payments too, so that's going to increase your financial robustness in addition to eliminating a negative bond; so that one's an easy one to bless.

So, here's the deal. You get to choose between efficiency and robustness. If you dump all your after tax dollars into paying off the debt, you will most likely outperform a balanced portfolio and have a good shot at outperforming the S&P 500 after taxes. As such, it is clearly the most "efficient" means of tackling the problem.

On the flip side, by keeping the taxable money available to tap in case of emergency, you increase your financial robustness by increasing the size of assets available in an emergency. NOTE this won't exactly work if you put it all in an S&P fund and then have to sell at the bottom during a 2008 style crash after losing 2/3 of the portfolio value; however you'll still have more money available.

No right choices, only compromises.
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Nate79
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Re: Student loan debt vs investing

Post by Nate79 »

I would work on paying off your extremely high debt load.
flyfishers83
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Re: Student loan debt vs investing

Post by flyfishers83 »

I will also add that some people will feel that debt burden as an anchor that impedes a lot of life decisions. Other people do some math and are fine with the debt. Only you can answer that.

You didn't ask about the makeup of your contributions, but it might not make sense to use a Roth 401k in your tax bracket and with your competing goals.
khram
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Re: Student loan debt vs investing

Post by khram »

I would prioritize paying off the loans. If refinancing means they go private, I'm not sure. I don't know how loan forgiveness works.

You didn't put your expenses or income down, but you've taken on a lot of debt. Granted, the mortage isn't very large.

If you just invest the minimum to get the match, and let current 150k grow for the next 30 years, you'll still be okay. Obviously once you pay off the debt, you should go back to investing. But I'd try to knock the debt out first. Getting rid of the debt will help you sleep and live a less stressful life.
Big Dog
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Re: Student loan debt vs investing

Post by Big Dog »

What is your family income? (24% is a broad category) NYS tax bracket? 6.5% for a total of ~30%? Potential for salary increases (which would raise your tax brackets?) Add in NYC local tax?

Mortgage is pretty pricey. Did you miss the refi window?

I'd payoff the small loan just to get rid of it. And then, I'd max the 401l for employer match and start making extra payments on the second Ed loan.
System1
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Re: Student loan debt vs investing

Post by System1 »

itsdan89 wrote: Wed May 05, 2021 3:24 pm
Debt:
Student Loan A – 14k @ 4.375 (currently 0% - have cash on hand to pay)
Student Loan B – 141k @ 6.85 (currently 0% and will be refinancing @ ~3%)

Trying to determine how aggressive to be with paying off 140k student loans. We are in the process of refinancing and are looking at 3.2% @ 10 years or 3.08 @ 7 years.
Since all of your debt is currently at 0% interest I'm assuming they are all Federal Loans. There has been some discussion of partially canceling some of that. If you refinance that to a private loan, you loose a lot of protections, Income Based Repayment, loan forgiveness, etc. I have some federal loans, but I know my salary will likely mean they won't be forgiven in 25 years in the IBR program, so I'm planning to pay them off at a reasonable pace (5 years). However, I'm not paying on Fed loans at all right now, just letting it sit in a savings account. For my non federal loans, I have been paying the highest interest one off faster than I planned pre-Covid (my federal loans are the highest interest rate).

I'm not saying don't pay it off, I'm just providing some info to consider.
tashnewbie
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Re: Student loan debt vs investing

Post by tashnewbie »

I don’t know what you should do about your specific question.

But both of you probably should be doing traditional 401k contributions.

I’d at least do those to get full employer match.

Also, it’s not clear to me what you’re planning to do with the Rollover IRAs. Are those rollovers of Roth 401k or Traditional 401k? If the latter, then you’d have to pay taxes on those balances to convert to Roth IRA, which probably isn’t advisable for you unless balances are pretty low.
Topic Author
itsdan89
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Re: Student loan debt vs investing

Post by itsdan89 »

tashnewbie wrote: Wed May 05, 2021 8:04 pm Also, it’s not clear to me what you’re planning to do with the Rollover IRAs. Are those rollovers of Roth 401k or Traditional 401k? If the latter, then you’d have to pay taxes on those balances to convert to Roth IRA, which probably isn’t advisable for you unless balances are pretty low.
My wife and I both had Roth 401k and traditional 401ks. We opened up a Roth IRA and rollover IRA fidelity to move the funds to. There should be no penalty or tax for doing it this way right?
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FiveK
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Re: Student loan debt vs investing

Post by FiveK »

itsdan89 wrote: Wed May 05, 2021 8:51 pm My wife and I both had Roth 401k and traditional 401ks. We opened up a Roth IRA and rollover IRA fidelity to move the funds to. There should be no penalty or tax for doing it this way right?
Correct, rollovers between like accounts do not cause penalty or tax. See https://www.irs.gov/pub/irs-tege/rollover_chart.pdf.
Topic Author
itsdan89
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Re: Student loan debt vs investing

Post by itsdan89 »

System1 wrote: Wed May 05, 2021 8:00 pm
itsdan89 wrote: Wed May 05, 2021 3:24 pm
Debt:
Student Loan A – 14k @ 4.375 (currently 0% - have cash on hand to pay)
Student Loan B – 141k @ 6.85 (currently 0% and will be refinancing @ ~3%)

Trying to determine how aggressive to be with paying off 140k student loans. We are in the process of refinancing and are looking at 3.2% @ 10 years or 3.08 @ 7 years.
Since all of your debt is currently at 0% interest I'm assuming they are all Federal Loans. There has been some discussion of partially canceling some of that. If you refinance that to a private loan, you loose a lot of protections, Income Based Repayment, loan forgiveness, etc. I have some federal loans, but I know my salary will likely mean they won't be forgiven in 25 years in the IBR program, so I'm planning to pay them off at a reasonable pace (5 years).

I'm not saying don't pay it off, I'm just providing some info to consider.
I have considered this. We would have started posting this much sooner if it wasn’t for my wife qualifying for the PSLF att her previous job. I am half expecting that we would be disqualified from any forgiveness because our incomes.

To your point I am currently just seeing money aside every month instead of making payments. When the interest starts I plan to get rid of the smaller loan, pay down whatever excess we save on the larger loan and then refinance what’s left.

What are you thinking you are going to do with you investments while you are paying the loan?
Topic Author
itsdan89
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Re: Student loan debt vs investing

Post by itsdan89 »

Big Dog wrote: Wed May 05, 2021 7:48 pm What is your family income? (24% is a broad category) NYS tax bracket? 6.5% for a total of ~30%? Potential for salary increases (which would raise your tax brackets?) Add in NYC local tax?

Mortgage is pretty pricey. Did you miss the refi window?

I'd payoff the small loan just to get rid of it. And then, I'd max the 401l for employer match and start making extra payments on the second Ed loan.
Family income is ~$190k, so total tax is about 30%. There is a relatively good chance for salary growth, especially my wife’s.
Looked into refi but we are quickly outgrowing our house and are looking to move in the 5ish years. That was probably information worth sharing initially. After factoring in closing costs it didn’t seem worth it unless we were going to staying in the house for more than 10 years.
Last edited by itsdan89 on Wed May 05, 2021 9:47 pm, edited 1 time in total.
Topic Author
itsdan89
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Re: Student loan debt vs investing

Post by itsdan89 »

flyfishers83 wrote: Wed May 05, 2021 6:47 pm You didn't ask about the makeup of your contributions, but it might not make sense to use a Roth 401k in your tax bracket and with your competing goals.
Can you elaborate on this? After reading the responses here and thanking more about it I think we will drop our 401k contributions to the minimum for the match. Now my 401k plan has a Roth option which I have been utilizing solely for the past year. Is I have mentioned still learning the Bogle way and in the middle of the Bogleheads Guide to Investing but I thought the Roth was generally prioritized to max out before first.
khram
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Re: Student loan debt vs investing

Post by khram »

itsdan89 wrote: Wed May 05, 2021 9:29 pm
flyfishers83 wrote: Wed May 05, 2021 6:47 pm You didn't ask about the makeup of your contributions, but it might not make sense to use a Roth 401k in your tax bracket and with your competing goals.
Can you elaborate on this? After reading the responses here and thanking more about it I think we will drop our 401k contributions to the minimum for the match. Now my 401k plan has a Roth option which I have been utilizing solely for the past year. Is I have mentioned still learning the Bogle way and in the middle of the Bogleheads Guide to Investing but I thought the Roth was generally prioritized to max out before first.
If you go with traditional 401k, you'll have more take-home pay to throw at loans.
Topic Author
itsdan89
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Re: Student loan debt vs investing

Post by itsdan89 »

khram wrote: Wed May 05, 2021 9:32 pm
itsdan89 wrote: Wed May 05, 2021 9:29 pm
flyfishers83 wrote: Wed May 05, 2021 6:47 pm You didn't ask about the makeup of your contributions, but it might not make sense to use a Roth 401k in your tax bracket and with your competing goals.
Can you elaborate on this? After reading the responses here and thanking more about it I think we will drop our 401k contributions to the minimum for the match. Now my 401k plan has a Roth option which I have been utilizing solely for the past year. Is I have mentioned still learning the Bogle way and in the middle of the Bogleheads Guide to Investing but I thought the Roth was generally prioritized to max out before first.
If you go with traditional 401k, you'll have more take-home pay to throw at loans.
Oh, duh
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FiveK
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Re: Student loan debt vs investing

Post by FiveK »

itsdan89 wrote: Wed May 05, 2021 9:29 pm ...I thought the Roth was generally prioritized to max out before first.
For most, traditional will work better. But most does not equal all, so it's something individuals should estimate for themselves. See Traditional versus Roth for more.
CoastLawyer2030
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Re: Student loan debt vs investing

Post by CoastLawyer2030 »

itsdan89 wrote: Wed May 05, 2021 3:24 pm Emergency funds: 4 months expenses + 14k to pay off student loan A.

Debt:
Student Loan A – 14k @ 4.375 (currently 0% - have cash on hand to pay)
Student Loan B – 141k @ 6.85 (currently 0% and will be refinancing @ ~3%)
Mortgage – 92k @ 4.125%

Tax Filing Status: Married

Tax Rate: Federal 24%

State of Residence: New York

Age: 32 and my wife is 36

New annual Contributions
$9,700 his roth 401k + 3,880 match
$9,400 her traditional 401k + 3,760 match
IRA accounts were recently opened with some 401k rollovers so will be looking to reallocate some of these contributions to the roth IRAs

Total portfolio is ~$150k right now


Trying to determine how aggressive to be with paying off 140k student loans. We are in the process of refinancing and are looking at 3.2% @ 10 years or 3.08 @ 7 years.
Should we be looking at dropping our 401k/IRA contributions to the lowest possible to earn our company’s match to be as aggressive as possible with the debt?
Does it make more sense to pay the minimums and more interest and invest more to take better advantage of compounding interest?
I have 14k set aside to pay off my smaller student loan – would it be unwise or worth it to invest it for 6 months until the interest is set to resume? If so what kind of investments might be suggested?

Thanks in advance
I am in a somewhat similar position. My wife and I had a total of $225k in student loans when we graduated.

She graduated in 2013 with about $70k, and we paid those off by 2016 in part helped by her receiving an $19k inheritance.

I graduated in 2014 with about $155k in student loans. My initial plan was to use all the income-based repayments plans for 25 years. This meant that we invested a lot to lower our AGI. Then my income started getting higher and I did not like basing almost my entire financial life around student loans.

Fast forward to now and my loan balance is $104,000, all federal. Since COVID I have been hoarding cash to pay these off, even taking a $50,000 CARES Act distribution (that I will re-contribute).

My cash holdings to pay these off are $99,000. I will have more than enough to pay them off by September 30. Right now I am sitting and waiting for the federal government to do anything. If they don't by September 30 then I am just going to call it a day and pay them off.

For me, debt is an anchor, both mentally and in terms of monthly cash flow. Once the student loans are paid off then our only debt will be our mortgage. No car debt, no credit card debt, no student loans, no HELOC, etc. This is extremely freeing.

Bottom line, if I were you, I would make a plan to pay as huge of a chunk as possible by September 30, refinance, and then pay them off in a short but manageable time frame, while still investing.
tashnewbie
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Re: Student loan debt vs investing

Post by tashnewbie »

itsdan89 wrote: Wed May 05, 2021 8:51 pm My wife and I both had Roth 401k and traditional 401ks. We opened up a Roth IRA and rollover IRA fidelity to move the funds to. There should be no penalty or tax for doing it this way right?
As long as you're just transferring the Roth 401k to Roth IRA, there is no tax. But you will pay tax if you're converting traditional 401k to Roth IRA. It sounds like you're transferring the traditional 401k balances to Rollover IRAs. In your tax brackets, it's not ideal to have Rollover IRAs (because pretty soon you'll probably need to use the backdoor method to get money into Roth IRA, and pretax IRAs complicate that method). I'd transfer traditional 401k/Rollover IRA balances into current 401ks, assuming options and fees are decent.
Edujo
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Re: Student loan debt vs investing

Post by Edujo »

I wanna second coastlawyers response. I came on here a few months back in a similar situation (~175K loans). For the last 6ish years, I had paid the minimum(was on the 25 year plan too) and heavily invested. Luckily, my investments got to a point where I was going to use the money to buy a house. After some perspective on here and elsewhere, I decided to use it to payoff loans. Due to the 0% interest, I’m waiting until September to actually pay it off. In the meantime, I liquidated some assets so that I have a 100k in HYSA and the rest i have still invested and hoping for a little growth between now and September. The benefit of aggressively paying off the loan is a huge mental relief that trickles into other parts of your life. I literally have better quality sleep at night. I no longer have to plan my career with the idea that I must find the most money possible because my salary is discounted by ~25% due to student loans. More importantly, it does get easier to deal with everything else. No I can’t buy my house today, but I’ll be able to do it next year. So, I’d say pay it down as much as possible, refinance the rest and invest the rest with the idea that you’ll cash it out soon for the student loans. I did the lower payment route at first but literally invested almost every other free dollar I could in company stock and taxable accounts etc. I didn’t start maxing out my 401k until the last 2 years (as income grew), but meeting the match threshold was crucial. I don’t own a house, so I don’t know for sure, but I imagine only having mortgage debt feels a lot better than student loan debt haha.
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vineviz
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Re: Student loan debt vs investing

Post by vineviz »

itsdan89 wrote: Wed May 05, 2021 9:29 pm
flyfishers83 wrote: Wed May 05, 2021 6:47 pm You didn't ask about the makeup of your contributions, but it might not make sense to use a Roth 401k in your tax bracket and with your competing goals.
Can you elaborate on this? After reading the responses here and thanking more about it I think we will drop our 401k contributions to the minimum for the match. Now my 401k plan has a Roth option which I have been utilizing solely for the past year. Is I have mentioned still learning the Bogle way and in the middle of the Bogleheads Guide to Investing but I thought the Roth was generally prioritized to max out before first.
I think this is a good plan. A nice effect of contributing to the Roth 401k plan is that the company match will be contributed to the traditional side of the plan, so you naturally get some tax diversification.

And yes, for young professionals (especially those with good earnings prospects) Roth contributions should generally be prioritized over tax-deferred contributions unless you are specifically trying to manage your taxable income for some reason.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Topic Author
itsdan89
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Re: Student loan debt vs investing

Post by itsdan89 »

tashnewbie wrote: Thu May 06, 2021 8:59 am
itsdan89 wrote: Wed May 05, 2021 8:51 pm My wife and I both had Roth 401k and traditional 401ks. We opened up a Roth IRA and rollover IRA fidelity to move the funds to. There should be no penalty or tax for doing it this way right?
As long as you're just transferring the Roth 401k to Roth IRA, there is no tax. But you will pay tax if you're converting traditional 401k to Roth IRA. It sounds like you're transferring the traditional 401k balances to Rollover IRAs. In your tax brackets, it's not ideal to have Rollover IRAs (because pretty soon you'll probably need to use the backdoor method to get money into Roth IRA, and pretax IRAs complicate that method). I'd transfer traditional 401k/Rollover IRA balances into current 401ks, assuming options and fees are decent.
Thank you for sharing this. If and when the time comes I want to use a backdoor IRA I would just open a new account? Is there any reason I couldnt or shouldnt do that?

I have a roth 401k option through my employer so this would be more of a concern for the ability of my wife to use a backdoor since she doesnt have a roth 401k.
tashnewbie
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Re: Student loan debt vs investing

Post by tashnewbie »

itsdan89 wrote: Mon May 10, 2021 9:00 am
tashnewbie wrote: Thu May 06, 2021 8:59 am
itsdan89 wrote: Wed May 05, 2021 8:51 pm My wife and I both had Roth 401k and traditional 401ks. We opened up a Roth IRA and rollover IRA fidelity to move the funds to. There should be no penalty or tax for doing it this way right?
As long as you're just transferring the Roth 401k to Roth IRA, there is no tax. But you will pay tax if you're converting traditional 401k to Roth IRA. It sounds like you're transferring the traditional 401k balances to Rollover IRAs. In your tax brackets, it's not ideal to have Rollover IRAs (because pretty soon you'll probably need to use the backdoor method to get money into Roth IRA, and pretax IRAs complicate that method). I'd transfer traditional 401k/Rollover IRA balances into current 401ks, assuming options and fees are decent.
Thank you for sharing this. If and when the time comes I want to use a backdoor IRA I would just open a new account? Is there any reason I couldnt or shouldnt do that?

I have a roth 401k option through my employer so this would be more of a concern for the ability of my wife to use a backdoor since she doesnt have a roth 401k.
I wouldn’t worry too much about backdoor Roth right now if you don’t have to use it. But I made my earlier comment as a warning against having Rollover IRAs, because those complicate the backdoor method due to the pro rata rule. Easy way to avoid that is to avoid having Rollover IRAs (or any other pretax non-Roth IRA). Any pretax non-Roth IRA, regardless of where it’s located, implicates the pro rata rule.

I’m not sure what you’re asking. If you had a Rollover IRA, it wouldn’t be as simple as opening a new (Traditional IRA) to do the backdoor. You’d need to get rid of RIRA by either converting (and paying tax) to Roth IRA or transferring into a 401k. As mentioned by others and myself above, in your higher tax brackets and with the debt load, personally I’d use traditional 401k and put tax “savings” into the loans.
Topic Author
itsdan89
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Re: Student loan debt vs investing

Post by itsdan89 »

Thanks you for the clarification. I was slightly misunderstanding the pro rata rule.
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